Jackson Hole and the Path for Interest Rates

Jackson Hole and the Path for Interest Rates

Stocks finished higher for the week despite a bumpy final session, with the S&P 500 up 0.5% and the Nasdaq Composite up 0.9%. Strength was led by technology, following better-than-expected earnings from NVIDIA, Salesforce, and CrowdStrike, though Friday’s session pulled back after Fed Chair Kevin Warsh’s hawkish remarks at the Jackson Hole symposium.

Fed Rate Hike Odds Rise

Warsh told attendees that inflation remains uncomfortably high and reaffirmed the Fed’s 2% target as “firm and fixed,” a tone that pushed the market-implied odds of a September rate hike from roughly 35% to about 55% over the course of the week. The 10-year Treasury yield ended near 4.73%, while the 2-year yield climbed to 4.35% after Friday’s move.

Treasury Targets Long-Term Yields

To help manage upward pressure on longer-term yields, the Treasury Department has been expanding its buybacks of longer-dated securities, and officials are reportedly weighing whether to tap the roughly $950 billion Treasury General Account to help fund additional purchases. These steps may support market liquidity at the margin, but persistent inflation, elevated issuance, and resilient AI-driven investment remain the larger forces keeping yields elevated, in our view.

Inflation Data Update

Inflation data released during the week came in largely as expected: July’s headline PCE index rose 3.7% year-over-year, while core PCE, the Fed’s preferred gauge, held at 3.3%, both still well above target.

Labor Market Holds Firm

The labor market continued to show resilience without reigniting concerns of overheating. Initial jobless claims fell to 203,000, below expectations, and private payroll growth firmed according to ADP data, even as unemployment held near the Fed’s estimate of full employment at 4.1%. Consumer confidence, by contrast, slipped for a second straight month to 89.4, as households grew more cautious about the near-term outlook even as views of current conditions improved.

Earnings Growth Broadens

With 96% of S&P 500 companies having reported second-quarter results, 86% topped analyst estimates, with earnings surprises averaging 27% and gains broad-based across 10 of 11 sectors. That breadth is a healthy sign, reducing the market’s reliance on a small handful of mega-cap technology names.

Looking Ahead

August has been a seasonally favorable month so far, with the S&P 500 up more than 3% for the month, a stronger showing than the historical average for August and September, typically softer periods for stocks. Combined with solid earnings growth and a resilient economy, we see this as a supportive, if not risk-free, backdrop heading into the historically choppier months ahead.

As Always

I’d like to leave you with the final line we’ve used since we started these commentaries back at the very height of market volatility in March 2020. Always remember that we create financial/investment plans not for the easy times, but to prepare for the tough ones.